Sub Prime Crisis

The U.S. bond market is almost twice the size of the combined market capitalization of all U.S. stock markets. Bonds are big players on the global financial stage. U.S. bond market debt (generally referred to as "the bond market") exceeds $27 trillion—making it by far the largest securities marketplace in the world. Mortgage Related Securities is $7.2 Trillion out of $27 Trillion.

Different types of Mortgages in US
1) Government Backed Mortgages- Administered by Federal house Administration, Veteran's Administration.
2) Conforming Mortgages- Mortgages eligible for purchase by Fannie Mae and Freddic Mac. Upto credit risk of 80% LTV and good credit history.
3) Jumbo Loans- Mortgages with principle greater than Conforming loans.
4) Sub Prime and Near Prime Loans- Subprime less than 620, Near Prime 620 to 680, Prime above 680.
5) Alt-A- When near Prime loans r securitized. They form Alt-A.
Sub Prime Lending is 20% and Jumbo Prime Lending is 12% as shown in Figure. So MBS which are causing turmoil are worth 1.44 + 0.86 Trillion.

Contract Features:
1) Fixed rate mortgage
2) Adjustable rate mortgage
To avoid high initial mortgage payments, many subprime borrowers took out adjustable-rate mortgages (or ARMs) that give them a lower initial interest rate. But with potential annual adjustments of 2% or more per year, these loans can end up costing much more. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable period ends) equates to a payment of $4,220.

Flaw1:
ARM at low interest rate means people taking more advantage of leverage. Such ARM's should be reduced and loans should have been given cautiously.

Mortgage Funding
1) GNMA or Ginie Mae securities are collateralized by FHA/VA securities.
2) Non Agency Mortgage Market: Jumbo and Sub Prime Lending in this category.

FreddiMac and FannieMae
1) Mortgaged Backed Securities
2) Debt Securities
Fannie and Freddie account for half of all mortgages in the US. Freddie and Fannie have lent or underwritten about £2.7 trn of the total £6 of outstanding mortgage debt in the US.

Flaw2:
They should have underwritten those Mortgages under more guidelines. Rather than becoming an intermediately and giving guarantees which can't be fulfilled. These organizations were the one who leveraged the problem to hell.

I-Banks and Commercial Banks
They were the one's to invest heavily in the Mortgage Securities.
Losses
CitiBank 56 Billion
Merrill 45 Billion
UBS 43 Billion

Flaw3:
Even AAA Rated thing has a systematic risk which should be considered. Even though the probability of occurrence might be meager but still it could have a cost, considering its weight. Everyone was betting over the Systematic Risk on Unsystematic Risk.

Effect over??
Properties with Foreclosure Activity
1.4 million In 2007
2.1 Million As in 3 quarters 2008.
'There are roughly 13 million subprime loans in the market today, the MBA says'.

How could it have been checked? Indicators ?

1) Home loans GDP ratio in US, UK continues to be at 50% as against 5% in India, it could have been an indication.
2) Subprime loans grew to 13.6 percent of the total mortgage market in 2006 from 2.4 percent in 2000, according to the Mortgage Bankers Association.

Solution
Long Term
1) Have better regulations on the Lender as well as Underwriter side.
2) Improve the employment opportunities in US

Short Term FannieMae
To achieve a more affordable mortgage payment, your loan servicer may:
1) Extend the term of your loan to as much as 40 years
2) Reduce your mortgage interest rate for a period of time
3) Defer payment of part of your principal, or offer a combination of all three.
'It is popular to take low lending standards as proof that the free market has failed, that the system
that is supposed to reward productive behavior and punish unproductive behavior has failed to do so'. May be it is inherent to Human that they have a short term approach and believe in the policy 'Let the last man bear'.

R&D Section

Human Brain
Two greatest peopl Einstein and Keynes.
Londons Anatole Kaletsky and Nw York's Jim Grant and Alan Abelson as underrated journalists of Fin Class, Gary Stix among scintific Journalists.
It is not Mayanrd Keynes, not Alfred Marshell, not Paul Samuelson, not Milton Firedman but Daniel Kahlmann and Amos Tversky
Birthday Paradox.
Butterfly effect

TimePass Liners

'One does not learn how birds fly by studying feathers but rather by studying aerodynamics.'

'Courage comes from underestimation of randomness in things rather than noble ability to stick one's neck out for a given belief.'

MBA's r evaluated on how intelligent they sound, not on scientific measure of their knowledge of realty :)

Consumers consider 75% fat free Ham different from 25% Fat Ham i.e. what is marketing.

Even a broken clock shows right time twice a day.

Fooled by Randomness

Book recommended by Prof UD in Security Analysis & Portfolio Management class. And a must read for all Finance guys. Good read for Non-Fin guys too.

Some of the things worth mentioning:
1. How much would you pay for insuring yourself for $1 Million, if you die during the trip? And how much would you pay for insuring in the event of death from a terrorist attack?

In most cases, your answer to second choice would be more because our brain tends to go for superficial clues when it comes to risk and probability.

2. Survival of least fit: Carlos and John kept investing and earned profits in booming market. When market started falling down they started averaging down till the time they got wiped off.
So at the time they were at their peak, it was not because of survival of fittest but due to randomness. For evolution fitness means to one and only one time series and not average of all possible environments.

3. We take past data as homogeneous set, but what if the Urn which consisted of only Red/Black balls contains only Black balls now :)

4. Infinite monkeys sitting and one got the word 'ILLIAD' now would you bet on him writing 'Odyssey'.

5. Trading Rule: No amount of white swans can allow the interference that black swams are not there, but observation of single black swam is conclusive.

Experience of LEM workshop by Prof Sunil Handa

LEM workshop by Prof Sunil Handa held at IIMK Campus from Oct 3rd to Oct 5th, 2008 was one of the best experiences I had at the campus.The experience is as fresh as if it just happened yesterday.

I was interacting with him on mails from July,08 when he finally accepted to come on campus. Sambha and I went to receive Prof Handa and Devashish Chakravarty (Quetzal) at Kozhikode International Airport.

As we sat in Car around 1:30 PM, Prof started asking things about Kozhikode. What is special in Kozhikode, where do u get those things, Can we go there now :) What do we do when we get to Campus. The whole plan for Prof was planned as to when he'll be taking LEM workshop in audi and when individual counseling. His first session was supposed to happen in the evening at 7 PM. That means he was free till evening. We thought he would like to take rest after the days journey
(Ahmedabad->Mumbai->Kozhikode->Campus). But energetic Prof asked me to keep individual sessions from 2:30 PM to 6:00 PM and it was already 2:00 PM.

We had informed students Saturday, the next day for individual counseling. So now I told Sambha to stay with Prof and start his B-Plan session at 2:30 PM. That means I have time till 3:00 PM to arrange things. Managed another person for 3:00 PM slot and then I had to go myself as there was no person available for 3:30 PM slot.

The session was very interesting with Prof. I told Prof about B-Idea 1, it was about having an online portal for making students read book through pocket money. Prof said Students should have Role Model rather having money as incentive so said think for some other idea.Before he could ask for next student, I started with B-Idea 2 which was related to Medical Profession,
having a single platform for doctors and practioners. He said go for some another B-Idea. Then I came up with third B-Idea :) and it was related to Pellet Plant in Steel Sector.That idea he agreed upon and said huge opportunities are there in the sector. Finally I left the session
taking a smile with me. The session went for around one and a half hours. Some how managed to get people and kept Prof busy with students till 6:00 PM in evening. After the session Prof said to Devashsih “1-2 entrepreneurial material hein " And I got a good feel because some how I knew that even if there's 1 person he'z talking about I am in the list. And I also knew how the sessions for other went.

Then started Prof's first LEM session at 7 PM in evening. The Audi was jam packed. One of the guys asked Prof 'What it requires to be Entrepreneur'. And Prof had interesting answers with him. I remember Prof Saying "Junta ki pahtti hein". Also then his remarks like "Ladkiyaan bethi hein is liye bol nahi sakti baaki tum samazh jao" and the full audience laughs. He shared his journey of life, told different instances. How he shifted from distribution to his own
brand. Value of having your own brand, How marketing without distribution is failure. Never open a Company on your Father/Mother/Sons name. Everything was told with interesting examples.The session ended around 10 PM in night. And finally I had some time with me to manage next day's plan.

In the second workshop on Saturday Prof asked Devashish to take LEM workshop. He talks only logic and convinced people on their arguments. It was a good session but then Benchmark had been created by Prof Handa in the minds of students. And Prof has amazing skills when it comes to oration.

Next session was in evening and was too good session. He discussed different Sectors. He asked students to venture into Power Sector, Solar Energy future of India, Tourism. He asked students to be peoples Manager rather having useless attitude. He said be like Bill Clinton, Indira Gandhi. He told how he met Bill Clinton and Richard Branson. He said how important it is for you to care your parents and biggest day in life of parents is when a person tells them u have a great Son. The session ended again late night. There were many Start-Up Companies who had come for Start Up Fair and were also listening to him. The session was mind-boggling.

And how can I forget to mention the comment Sir gave "I asked one of u r ECell Coordinators Aaditya for Pen and he searched his pocket twice, how can it be there once he has not found it initially". And audience laughs. Mene kha Sir ko Not Fair :)Sir is so sharp that he'll observe everything to minutest of details you can't even imagine.

And then the final session was on Sunday Morning 9 AM. U can well imagine B-School-IIM-K-Sunday, how difficult it is to make people attend without compulsory attendance. But Prof would pull crowd by himself. He asked audience to tell things which we remembered from LEM. I told him three things 'People’s Manager', 'Biggest day for Parent' and 'tum logoin ki phatti hein'.

After that he also gave me 'Stay Foolish, Stay Hungry' which I have with me as his blessings. I do read it but have made a point not to complete it in one go :)

Overall the best thing foe me was managing the whole LEM for Prof Handa. It’s an experience which makes you learn like anything. Stay with a person of such a high esteem even for a day and you would learn the difference in yourself.

Blogs that inspire me

Found a blog today that inspired me.
http://woodentrunk.blogspot.com/
May be it made me realize that how much I am missing on things. And I really need to act fast on things I want to do in life.

Other sites worth mentioning are
http://www.mkhoj.com/site/our_team.html
http://en.wikipedia.org/wiki/Anurag_Dikshit
Mkhoj team is amazing and who would not bet on such a team. And then u realize only one thing 'Work hard, Work Smart n Act fast'
Although Anurag Dikhsit's idea might not be inspiring as it might not be good for society. But what is inspiring is to what level he has gone.

And as of now I know one thing that I'll have my Time coming.